Why Apple, Microsoft and Berkshire Hathaway are sitting on mountains of cash

So much cash is raining on some US-based corporations that they are at a loss on what to do with all the money.

With the $US250 billion sitting in its bank account, Apple could comfortably go out and buy Chevron, the second-largest US oil company, at today’s market price without borrowing a penny. The technology giant would still have $US50 billion left to buy more than 700,000 Tesla model S electric cars or about four Gerald R. Ford class aircraft carriers.

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Then there’s Microsoft. The Seattle-based software maker has the second-largest stash, at $US126 billion, enough to buy a $US100,000 home for 1.2 million Americans.

Legendary investor Warren Buffett will preside over his annual Berkshire Hathaway shareholder meeting this weekend in Omaha – known as “Woodstock for Capitalists” – while his company sits on $US86 billion in cash. That’s enough to pay for New York City’s government operations for a year.

The cash hoards are coming to the forefront as earnings season is heating up. US companies are reporting mostly robust profits, and the stock market, especially technology shares, are ballooning. Some investors have cautioned that equities are frothy in light of the geopolitical risks such as North Korea and the political divide in the country.

A big part of the reason behind the rich corporate caches is taxes – or unpaid taxes. Apple, Microsoft and many other US-based international companies are sitting on well more than $US2 trillion in cash from untaxed overseas profits, which could be brought back to the United States to be used for investment and dividends if lawmakers lower the US corporate tax rate, which at 35 per cent is one of the highest in the world.

“Apple is one of the best companies in the world, and a third of their value is sitting in vaults in Switzerland and Luxembourg and Dublin,” said Timothy Loughran, a finance professor at the University of Notre Dame’s Mendoza College of Business. “Isn’t that pathetic?”

Microsoft is sitting on enough cash to to buy a $US100,000 home for 1.2 million Americans. Photo: Bloomberg

The Trump administration has promised to lower the corporate tax rate significantly. Economists and politicians on both sides of the aisle have said a lower corporate tax rate or a tax holiday that repatriates money from overseas will unleash hundreds of billions of dollars, if not trillions, in dividends and business investments in the United States.

“Companies have been accumulating cash over many years,” said David Kass, a finance professor at the University of Maryland’s Smith School of Business. “The perverse disincentives of our current corporate tax system are discouraging corporations from bringing back international profits to invest in the US”

Apple earned $US45.6 billion in profit in 2016. Photo: Bloomberg

Apple chief executive Tim Cook, in an interview with The Washington Post last year, said federal and state taxes on Apple’s cash reserves, the vast majority of which is overseas, is about 40 per cent. Many US-based companies leave their earnings overseas rather than pay the US rate.

“We’ve said at 40 per cent, we’re not going to bring it back until there’s a fair rate,” Cook said, adding that his company is the largest US taxpayer. “There’s no debate about it. It is the current tax law. It’s not a matter of being patriotic or not patriotic.

Warren Buffett’s Berkshire Hathaway sits on enough cash to pay for New York City’s government operations for a year. Photo: Charles Sykes

“We think it’s fine for us to pay more, because right now we’re paying nothing on that and we leave it over there,” he said. “But we – like many, many other companies do – wait for the money to come back.”

If the corporate rate is reduced or a holiday is granted, Apple, Microsoft and others could pay a special dividend, buy back shares or both. They could also make acquisitions, although Apple has preferred to grow organically by inventing new products such as the iPhone and iPad and investing in itself.

Apple earned $US45.6 billion in profit in 2016 on revenue of $US215 billion. It paid a handsome dividend of $US2.18, although the rise in share price has cut its yield to about 1.7 per cent and made the shares much less of a bargain than they once were.

If Apple chose a special dividend, its $US250 billion would cover a $US48 payment on each of its 5.2 billion shares. That is highly unlikely, although some lump sum dividend is possible, and it could touch nearly every American who has a retirement plan or owns taxable mutual funds.

“What is going to happen when Apple has $US1 trillion in cash?” said Loughran, pointing out that the iPhone 10 is due out this year. “It won’t be that long. What are we going to do then? The way I think about it is the treasure of America sitting in a vault in Switzerland. We created $US250 billion from profits and we are not using it. This is an obvious reform that is needed.”

Kass said he expects a major return by Apple to shareholders through several vehicles, including an increase in the Apple dividend, stock buybacks and a big one-time dividend. He said it is less likely that Apple would make acquisitions, given the company’s historic aversion to them. Berkshire Hathaway has little in overseas exposure because most of its profits are made in the United States. And Buffett has been reluctant for Berkshire Hathaway to pay dividends, arguing that he can make better use of the money by finding smart investments.

“His companies are sufficiently profitable, and he is very patient, that his cash has accumulated over several years,” Kass said. “But if the corporate rate is lowered from 35 per cent to 15, 20, 25, it will result in additional profits for Berkshire and just about every other American-based corporation.

“If that takes place, then Warren Buffett’s pile of cash will increase much further,” he said.